Freddie officials wanted to protect the company's bottom line and some sought to nix a backdoor economic stimulus. The consequence: Homeowners stayed trapped in high-rate loans. (Win McNamee/Getty Images)

Freddie Mac, the taxpayer-owned mortgage giant, made it harder for millions of Americans to refinance their high-interest-rate mortgages for fear it would cut into company profits, present and former Freddie Mac officials disclosed in recent interviews.

In closed door meetings, two Republican-leaning board members and at least one executive resisted a mass refi policy for an additional reason, according to the interviews: They regarded it as a backdoor economic stimulus.

Freddie's policy was financially brutal: During the worst years of the Great Recession, when homeowners most needed the savings they could have gotten from refinancing to lower interest rates, Freddie helped keep millions of borrowers locked in high-interest-rate mortgages.

A more aggressive refi program by both Freddie and its sister company Fannie Mae would have helped an additional nine million homeowners to refinance, saving them nearly $75 billion in interest payments to date, Columbia University housing economist Christopher Mayer estimates. In addition, it would have prevented hundreds of thousands of delinquencies and foreclosures, he says. [UPDATE: Mayer released the estimates behind this calculation here; key information is in the fourth bullet point.]

Freddie's resistance to refis highlights a central conflict of interest that plagues both Freddie and Fannie. That conflict is even more pronounced now that they are owned by taxpayers. The companies, which own or back about 60 percent of U.S. home mortgages, have a mandate to help expand homeownership and also to generate profits. These goals can work at cross purposes.

Freddie and Fannie maintained and erected barriers to refinancings when the Obama administration launched a program in early 2009 specifically designed to make refinancing more accessible — the Home Affordable Refinance Program, or HARP. Freddie continued to hinder refinancings through a late 2011 relaunch of HARP designed to further slash refi costs and paperwork. At that point, Fannie began opening its gates more widely, but Freddie still kept barriers in place.

Only in the last few months, under a new chief executive, has Freddie loosened many of its restrictions on refinancing.

"Almost immediately after taxpayers bailed them out, Fannie and Freddie imposed unprecedented restrictions on refinancing, preventing millions of people from saving money on their mortgages and leaving hundreds of thousands of people to lose their homes unnecessarily," says Mayer. Then after the 2011 HARP relaunch, "Freddie was worse" than Fannie, he said.

The Internal Debate

Now, interviews with former board members and an executive have revealed two reasons why Freddie dragged its feet.

According to interviews, these officials feared that mass refinancing would hurt the company's bottom line and therefore its ability to repay taxpayers, who had bailed out Freddie and Fannie in 2008 to the current tune of almost $142 billion. Fears that borrowers who got refis would suffer high rates of default anyway, costing Freddie, have not been borne out.

Internally, Freddie debated its compliance with HARP for years. Robert Glauber, who left Freddie's board in March, contended in board meetings that aspects of the refinancing program were "designed to be a stimulus" for the economy, said John Koskinen, who served as Freddie Mac's chairman from 2008 to 2011, during which time he also served briefly as its interim chief executive.

Glauber, director Linda Bammann and head of risk management Paige Wisdom resisted mass refis. One executive viewed their objections as colored by partisan unwillingness to help the economy recover, something that would benefit President Obama.

But Koskinen did not regard the discussion as partisan. "I don't think we ever had a discussion of whether this was good for a Democratic administration."

Glauber was a Republican appointee to the Treasury Department under President George H. W. Bush and has had a career in various Wall Street roles. In a brief email to ProPublica, he disputed a quotation attributed to him but did not comment on the substance of the internal debates. He wrote that "it is an outrage that what claim to be confidential discussions in the board room are aired in your publication."

Bammann, who donated $250 to the National Republican Congressional Committee this year, declined to comment. Wisdom did not respond to requests for comment.

Freddie Mac declined to make an executive available. The company is "always trying to find a balance to stimulate borrowing on responsible terms at prices that protect us from risk," a spokesman said. The new CEO, Donald Layton, has made it clear that making changes to the company's refi program is "a major priority," the spokesman said. And he pointed out that Freddie has streamlined its refi process outside of the HARP program as well.

The spokesman declined to comment on Freddie's internal discussions.

HARP was intended to lower barriers to refinancing for borrowers, especially for those who have high loan balances or owe more than their homes are worth, known as being under water. But HARP has disappointed in part because of Freddie and Fannie's restrictive refi rules.

When the program was overhauled late last year, Freddie retained more restrictions than Fannie, puzzling many housing experts.

Still, after the HARP overhaul, refis have risen. Freddie Mac has done more than 284,000 HARP refis this year through August, compared with 185,000 for all of last year. Fannie has done 334,000 in the same period, compared with 215,000 last year. In all, the two companies have done more than 1.6 million refis under the program. The administration's initial goal was to help four to five million.

Concerns about providing a stimulus were not the only reason for Freddie's restrictions. Several company executives and board members worried that doing mass refis would hurt Freddie Mac's bottom line.

To appreciate this concern, it's crucial to understand Freddie's and Fannie's business. The companies are two-headed beasts: One part is an insurance company with a public mission to help the housing market and the other is an investment fund that generates profits by trading mortgage investments. The investment side existed originally to keep the mortgage securities markets flowing. But as the portfolios grew in the years leading up to the financial crisis, the tail began to wag the dog. The huge profits from the portfolios inflated executives' pay packages and began to overshadow the public mission of helping homeowners, critics say.

Refinancings can hurt the value of those portfolios. When a new, lower rate mortgage is issued, the old loan is paid off. The ultimate backer of that original loan — in this case Freddie or Fannie — takes a loss because the loan was "pre-paid," meaning it was paid off earlier than expected. Mortgage securities make money from interest rates paid over time, so they decline in value if the flow of interest payments gets cut off, such as when a refi allows the original loan to get paid off early.

Glauber was concerned about Freddie incurring such losses, because taxpayers were ultimately on the hook. "Bob's position would have been if it has a cost, it is not consistent with conservatorship," Koskinen said.

Bammann, a former executive of JPMorgan Chase, and Wisdom voiced similar objections. Wisdom criticized the refi program, saying that it was "policy, not business," according to the executive.

Board member Nicolas Retsinas, who served in various housing policy positions for the Clinton administration, argued consistently for an expansive refinancing policy, according to people familiar with the meetings. He argued that in calculating the costs of the refi program, Freddie should take into account the benefit from lowering defaults and foreclosures and the improved housing market and stronger economy that would come from refinancings.

Retsinas declined to comment.

Koskinen, a Democrat who served in the Clinton administration, said it was prudent for the board to discuss the costs of a refi program. "The board's view was you could decide to categorize it or ignore it but couldn't say it didn't exist. The intellectually honest thing was to say, 'How large was that cost?'" he said.

Freddie Frustrates Its Regulator

Early in the Great Recession, support for a mass refi program was bipartisan. Refis help borrowers who are current on their loans, scoring them prevailing rates.

Columbia economist Glenn Hubbard, now an economic advisor to Republican presidential nominee Mitt Romney, co-authored op-eds in the Wall Street Journal and later in the New York Times with his colleague Mayer, proposing a mass refi program. Many congressional Republicans supported it.

But the Wall Street Journal editorialized against it in February 2009, arguing a mass refi program amounted to undue government interference with the marketplace and would cause huge losses for taxpayers. Republicans turned against it.

The Obama administration and the Federal Housing Finance Agency (FHFA), which oversees Fannie and Freddie, didn't fix HARP for years.

Under conservatorship, the FHFA has the responsibility to regulate the companies and to approve their major business decisions. Ed DeMarco, the acting head of the agency, has become a political lightning rod, criticized for having been too timid in helping the housing market. Critics contend he underestimated how much such an overall improvement would eventually help Fannie and Freddie's bottom lines.

At the same time, DeMarco has been frustrated by Freddie Mac, according to people who are familiar with his tenure.

"Freddie is the party of 'no.' Fannie is the party of ‘let's make it work,'" said a person familiar with DeMarco and the FHFA.

The FHFA was frustrated when Freddie Mac announced its guidelines in November 2011 because they restricted refis more tightly than Fannie's did.

One example: Freddie was not going to allow certain well-situated borrowers into HARP, borrowers with a "loan-to-value" ratio of 80 or below. In other words, if a borrower had a $100,000 home and had a mortgage loan of $80,000 or less, he or she would not be eligible.

That wasn't the only restriction. Freddie sometimes required properties to be re-appraised, which added cost and delay. And it hindered the ability for borrowers to get a refi from a new bank rather than from the one that had given them the original loan. "We were adding barriers to the homeowner," says the Freddie executive.

Freddie's risk management operation, the division in charge of making sure Freddie doesn't take decisions likely to incur heavy losses, was particularly active in raising concerns over allowing more refis. For example, when Freddie insures a mortgage, it retains the right to void its guarantee and force the bank that made the loan to be responsible for it under certain circumstances, such as if the bank had done poor underwriting and the borrower's income was misrepresented. Facilitating refis under HARP could require giving up those rights. Wisdom, the risk officer, argued that Freddie should not give up such rights lightly, because surrendering them could cost Freddie dearly.

But since many borrowers on these Freddie-backed loans had been making regular payments for a number of years, others argued there would likely be only a relatively small number of cases in which Freddie would need to force banks to take back loans. Thus, Freddie wouldn't be giving up anything of much value.

Freddie Mac produced a memo in the fall of 2011, which was described to ProPublica, estimating that HARP would cause hundreds of millions of dollars in losses. The memo estimated big losses on the portfolio as well as from giving up the rights to return the loans. It minimized the benefits to Freddie's insurance business from an improved housing market and improved economy. It also minimized the costs to the company of trapping homeowners in mortgages with interest rates so high they would eventually default.

That analysis appears to have been overly cautious. A recent New York Federal Reserve study estimated how much refinancings can help reduce future defaults and found that the benefits were greater than expected. "We were too conservative and that's been subsequently borne out," says the Freddie executive.

DeMarco has said he instructed Freddie and Fannie not to take into consideration portfolio losses. In a letter to Sen. Robert Menendez (D-NJ) in May, DeMarco wrote that "FHFA specifically directed both [Fannie and Freddie] to exclude from consideration changes in their own investment income as part of the HARP evaluation process."

The existence of the memo raises a question of whether Freddie ignored that instruction from its regulator. It also raises the question of why FHFA did not act immediately to prevent Freddie from imposing its tighter rules.

DeMarco and the FHFA did not respond to requests for comment.

Freddie's 80 percent loan-to-value barrier had spillover effects. Mortgage experts say it led banks to reject out of hand borrowers who were close to that threshold. If a borrower initially appeared to qualify for a refi, but then the appraisal of the home pushed him below the barrier, Freddie would reject the refi and the mortgage company would have wasted time and money. So banks avoided a wide swath of homeowners whose loan-to-value ratio was near 80 percent.

At the FHFA, "nobody was happy with Freddie under 80 percent but we decided to deal with it later. And we dealt with it," says a person familiar with the FHFA's efforts.

Today, more refis are being done under HARP and the barriers at Freddie have started to come down. The new CEO, Donald Layton, deserves some credit, says the Freddie executive: "Don made important changes in the program and is willing to override narrow risk management. He took a broader view of the benefits and wasn't focused wholly on the costs."

23 comments

OBAMA ON TARGET
He campaigns on who can create jobs since the Republicans have no plan.
His message that the wealthy and corporations need to pay their FAIR share of Total Income
and the dire need for jobs is getting attention.

He is correct to run on the economy since he was left a skeleton.
Create jobs, protect entitlements, build the middle class, make wealth give in on more contribution.

He must stress over and over how the opposition fought every good thing he tried to achieve no matter how much it hurt the people. Paint them as villains. Ask the people to help him get America back on a track of jobs and more equality.

Book Report:
You really want to get frustrated… Read Sheila Bair’s book “Bull by the Horns”. She writes about all the roadblocks that were put up by these two agencies, Gaitner, and others. The FDIC approached the problem with their expertise and desire to quickly clean up the mess that lack of regulation created. Each step of the way, they were blocked.

It is a shame. And it should be a lesson. But reading now about the efforts to roll back the new laws, it doesn’t look like the public will be protected from these guys again.

Anybody who believes the “executives” at either of these companies—following the 2008 takeover by the Bush Administration and the operation of the two by the Obama Administration—control major decisions based on company needs or market moods, is smoking their lawn cuttings.

The Treasury to FHFA to Fannie/Freddie decision making process is well known to those who follow these matters closely.

So complain if you will, but don’t blame those who should but don’t have maximum control of their respective corporate fates.

The best result for the two former GSEs,the nation’s mortgage market, and its consumers lenders is to re-privatize them, leting them repay the Treasury in the process, and let/encourage them to move forward with no federal backing of any kind.

I lay this at Obama’s door. It was under his control as executive, just like the prosecutions of the banking control fraud criminals that didn’t happen. Obama is an appeaser who is incompetent to be president at a time like this.

Freddie can not control whether someone does a traditional re-fi with an 80% LTV…there is no pepay penalty, anyone can payoff at any time…however, should they allow those borrowers who are not in financial stress, who’s property is worth more than the debt, qualify for a program like HARP that only benefits a homeowner and not both parties like a traditional refi?

When you have to make the best decision for hundreds of millions of taxpayers sometimes you have to take a hard look on whethre it makes sense to go above and beyond for a handful of homeowners who couldve squeezed out a couple of extra bucks taking advantage of a program that wasnt designed for them.

Take some of that MHA money and let the GSE’s use it to fix up dilapidated houses in their REO and FC portfolios and help the entire country.

Whenever a system is centralized in terms of funding it encourages abuse—SallieMae, DoD, Pentagon and ends up dysfunctional—because it is difficult to understand the needs of all areas/people involved.

So, it’s better to distribute this house financing ability to state govts just like Medicaid. It allows better
monitoring and action tied to the needs of each region. Federal govt can act as a backstop.

If muni bonds can be issued by many agencies, why can’t mortgages be issued, managed similarly?
It will also allow financial mkts to grow all across the country instead of in one corner of the country I.e.
Wall st. This would allow each region to respond to growth/risk aspects of local mkts. Just like
various Federal Reserves do.

Here comes again ProPublica/NPR.
Their previous accusation against Freddie Mac about bets against homeowners was deemed deadly wrong by the Inspector General of the FHFA.
Now it says that Freddie Mac blocks refinancings because it increases its profits, but we all know that the payments of a mortgages pass through to the investors in Mortgage-Backed Securities (MBSs), because Freddie Mac’s function is just bundling the mortgages up after the purchase and immediately after, sell the MBSs to investors worldwide.
Freddie Mac only receives a fee for guaranteeing the payments to the MBSs’ investors.

Borrowers need permission from no one if they wish to re-fi. The GSAs are powerless to stop them. It’s only when the borrowers need a principal write-down (or some other form of ‘gift’) on the existing loan that permission is needed.

In case it slipped your oh-so-PC minds, the proposed giving of such permission, and the cost associated with it, are what ignited the formation of the Tea Party movement, in opposition to such handouts of taxpayer’s money. The inherent political issues of the program have yet to be settled.

Afraid I don’t understand this article, as Freddie merely buys and trades packages of mortgages. They do not originate. The refi decision is a function of the homeowner and the Mortgage company, ie. BACV, JPM, etc. The only thing Freddie could do is to refuse to buy the newly created mortgage.

David, you’re right about the function of Freddie and Fannie but consider this: Although they buy large packages of mortgages, they do not service these loans. They hand them out to smaller local banks to do that servicing and hold control of the loans. So, they can hold the borrower hostage when said borrower is either too lazy or just ignorant of the ability to go elsewhere to get that refi. then of course there is the fact that their loan may be upside down because they over-extended themselves before the crash.

Isn’t this…not new? I seem to recall their being praised by a number of people, at one point, for being so “fiscally responsible” because it was “taxpayer money” they were “gambling” with, even as the economy saw problems in response.

@Judge: Freddie Mac profits from this because they hold a portfolio of over $200 billion worth of their own MBS. These trade at above par value, so they may be worth $220 billion. If all the homeowners behind these bonds decided to refinance today, the bondholders only get the $200 billion, so Freddie would lose $20 billion.

@Roger Fox: Yes and no. The only way this costs taxpayers money is the way I just described above (Fannie also has a large MBS portfolio, as does the Fed). It can also save taxpayer money, because these are refinancings on mortgagees that Freddie already insures. Would you rather insure a loan that the borrower pays $1000 a month or $800 a month? When do you think a borrower is more likely to default, leaving us with the bill? As to “they can get a refi with someone else” - no, unfortunately there is not a private mortgage market in the U.S. today. Virtually all non-jumbo mortgages are guaranteed by the FHA or GSEs.

@John and Mark: the argument is that Freddie took an incredibly short-sighted view of “saving taxpayer money.” If you keep a borrower in an above-market rate mortgage, and they keep making payments for 3 years and then default, Freddie’s bottom line is better in years 1-3 than it would be with a refi. However, when that borrower defaults, we as taxpayers are all on the hook. If that borrower instead refinances, stays in their mortgage, and then doesn’t default, we all win.

This is the logic behind the Fed’s take that “refinancing is not a zero sum game”

You’re right about that, and it should - it has nothing to do with brother Eisinger’s piece and his deliberate misrepresentation of the role of GSAs in re-fis. He never so much as hinted that taxpayer gifts to deadbeats were involved. You seek to justify that ‘ex post facto’. Guess when you’re ‘perfectly PC’, like the two of you, fraud in the presentation gets the green light.

@James
The reality is that the mortgage portfolio are MBSs purchased to the banks, the so called Fraudulent Private-Label MBSs (FPLMBSs), also they are MBSs purchased to the other GSE, Fannie Mae.
Bottom line
Fannie and Freddie can’t decide who is allowed to refinance or not. Both just abide by the guidelines of HARP or HAMP, and is a negotiation between the borrower and the banks that service the mortgage.
A borrower can refinance a mortgage outside HARP, because HARP is only for borrowers with low equity in their home or underwater.

(1) I agree we shouldn’t be giving refis to “deadbeats.” But there are good people who are stuck in bad mortgages - it’s time to forget about the guys who took out ridiculous loans (100+ LTV, neg am, etc.) to get houses they could never afford. Those people are already gone, and they have been for some time. This is about people who have been responsibly paying their mortgage for the past 5 years but are still underwater because they took a job in Arizona or Florida at the wrong time. Furthermore, I’d be in favor of charging a higher GSE guarantee fee so taxpayers can actually make money on the refinancings. A higher g-fee would also put us on the right path to eventually getting rid of (or at the least heavily scaling back) Fannie and Freddie.

(2) I don’t disagree with you that Freddie’s portfolio losses should be on the table when discussing policy, and it would be foolish not to consider taxpayer losses when implementing HARP, HAMP, etc. The problem I have is that the info in this story directly contradicts what Ed DeMarco said in January: “FHFA specifically directed both Enterprises not to consider changes in their own investment income as part of the HARP evaluation process.” Will you at least agree that either this statement is false, or Freddie did not do as the FHFA directed?

@Judge

“Fannie and Freddie can’t decide who is allowed to refinance or not. Both just abide by the guidelines of HARP or HAMP” - this isn’t true. Fannie and Freddie actually set the guidelines of HARP, which is the center of this whole issue.

“The reality is that the mortgage portfolio are MBSs purchased to the banks” - not really sure what you mean by this, can you clarify? Fannie and Freddie break out their MBS holdings by GSE and private label - the $200 billion I referenced is just Freddie’s holdings of MBS that it itself guarantees.

I’ve said the Fraudulent Private-Label MBSs (FPLMBSs) are the MBSs issued by the banks. All the toxic securities the banks bundled up misleading investors and caused the worst financial crisis ever worldwide.
The only $200 billion mortgage portfolio that I recall is when the FHFA sued 18 financial institutions, on behalf of Fannie and Freddie, for the sale of a $200 billion portfolio of fraudulent Private-Label MBSs in September 2011.
Get it now?

Thank you for that well crafted statement of your position. Fact is, I don’t want to have that conversation. It’s been done to death by FelixS, and with no apparent progress toward a broadly agreeable solution to the underwater mortgage problem – there’s a lot of stuff going on here, particularly concerning Seconds on underwater properties. Also, the substance of that matter is not addressed at all in JE’s OP - that conversation belongs elsewhere than here.

There’s like $1.0Tril in losses to be realized if all underwater stuff is written down to FMV of the securing property. As a society, we have to decide who is going to pony-up the dough and eat that loss. Once we get that settled, executing it is easy. Until that is settled, executing it piecemeal at taxpayer expense and by stealth is not kosher, IMO. His ‘sub rosa’ advocacy of just exactly that is what has me all over JE and his twitchy piece.

In don’t know from HAMP and HARP - you’re likely right in your portrayal of it. I don’t want to know about that or do anything until we all get on the same page about where the cash is going to come from to get the job all-the-way-done.

Perhaps the entire financial meltdown could be characterized as $1 trillion in unrealized losses, much of that to the private sector banks/investment firms, but the USA political/financial actors have opted to slowly move these private losses onto the public books by cash for trash, direct subsidies (see AIG payouts on credit default swaps), free too big to fail insurance and the FED paying interest on excess reserves to banks..

There was a report of some private banks encouraging the other GSE ,Fannie, to write down principal mortgages. It was suggested the banks were interested in this because they had seconds on many properties that would be worthless if the homeowner defaulted, so writing down the primary mortgage made their seconds more valuable as the home owner was more likely to stay in the property.

It wasn’t that the banks were interested in the well-being of underwater homeowners.

One must be careful when someone suggests it is the right thing to do to write down principal and look deeper to see who is absorbing the loss, in this case, Freddie will pass the loss to the US taxpayer.

About the only benefit of this entire mess may be the USA will be unable to get on its high horse and lecture other countries on how to run an economy and banking system, as the USA now has a more concentrated banking system than in 2008, and may have another crisis in the near future as a consequence.

The amount of editorializing in this article is unbelievable. I guess Eisinger couldn’t get this into the Times or the WSJ, so he fooled the editors at ProPublican.

An unnamed executive “felt” as if Glauber and Wisdom didn’t want to do something that would help the economy and to ding the president. The report allows this golden executive to make such a breathless charge not only anonymously but with no proof as to what might have motivated his or her feeling except (besides the fact that one has made a small contribution to the RNC and another one worked for a Republican administration 20 years ago, which proves nothing). Are you kidding me?

So the whole idea that this is about politics—clearly the most sensational piece of the article—is attributed to the mental guesses of one unnamed source.

If you take away the poorly sourced controversy over politics, you’re left with a less sensational story—some executives at Freddie didn’t believe that the upfront costs of the program of certain components of the program were consistent with the board’s mandate to conserve the company’s assets. New management has concluded otherwise, and Freddie Mac has done more HARP loans relative to the size of its guarantee portfolio than Fannie (something that the article conveniently glosses over).

The HUD IG just demolished Eisinger’s last hyperbolic story (also very thinly sourced—Mayer? the guy who in 2005 said there was no housing bubble? Please.) Folks who actually trade or price mortgages know what I guess the Propublican editors haven’t figured out—this guy is just carrying water for a handful of folks with an agenda, but with little knowledge of the mortgage business.

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